Netflix to Pay Comcast for Smoother Streaming

By Shalini Ramachandran

Netflix Inc. has agreed to pay Comcast Corp. to ensure Netflix movies and television shows stream smoothly to Comcast customers, a landmark pact that could set a precedent for Netflix’s dealings with other broadband providers, people familiar with the matter said.

In exchange for payment, Netflix will get direct access to Comcast’s broadband network.

The deal comes just 10 days after Comcast agreed to buy Time Warner Cable Inc. The acquisition, if approved, would establish Comcast as by far the dominant provider of broadband in the U.S., serving 32 million households before any divestitures it might make. It also comes amid growing signs that congestion deep in the Internet is causing interruptions for customers trying to stream Netflix movies and TV shows.

People familiar with the situation said Netflix Chief Executive Reed Hastings didn’t want streaming speeds to deteriorate further and become a bigger problem for customers.

In a statement confirming the broad outlines of the deal, the companies on Sunday said the agreement would provide “Comcast’s U.S. broadband customers with a high-quality Netflix video experience for years to come.”

The debate has been heating up over who should bear the cost of upgrading the Internet’s pipes to carry the nation’s growing volume of online video: broadband providers like cable and phone companies, or content companies like Netflix, which make money by sending news or entertainment through those pipes.

While several big Web companies in recent years have started paying major U.S. broadband providers for direct connections to get faster and smoother access to their networks, Netflix has held out—until now.

For the past year, the online-video giant, which has more than 30 million paid subscribers in the U.S., has been in a standoff with all of the major broadband providers, including Comcast, AT&T Inc., Verizon Communications Inc. and Time Warner Cable Inc.

Netflix wanted to connect its specialized servers free of charge to the providers’ networks, arguing that such a link would improve streaming quality for its customers.

Netflix has won such agreements from some smaller broadband providers in the U.S., including Cablevision Systems Corp., as well as operators overseas. But major U.S. providers, including Comcast, wanted to be paid for the connections, because of the heavy load of traffic Netflix sends through their networks.

In the wake of its deal with Comcast, Netflix is likely to agree to compensate the other big providers, said a person familiar with the situation.

Netflix has historically routed its streaming content to broadband providers through a number of Internet middlemen. But since mid-2012, the company has been trying to reduce what it pays these middlemen by getting broadband companies to hook up directly to its new video-distribution network without paying them fees for carrying its traffic.

In recent months, traffic jams have developed on some of its existing connections through middlemen to broadband providers like Comcast and Verizon. These bottlenecks included Cogent Communications, which Netflix was using as a “primary” route into Comcast, a person familiar with the matter has said.

People familiar with Netflix’s and Cogent’s thinking have said the broadband providers had been delaying upgrading those links. But broadband executives privately complained that Netflix could route its traffic more efficiently. Netflix has said that it carefully plans its traffic routes to make sure customers have the best experience possible.

According to recently published Netflix data, the average speeds of the company’s prime-time streams to Comcast subscribers dropped 27% from October to January. Netflix’s streams to Verizon subscribers also have slowed in recent months.

Over the weekend starting Feb. 14, the day that Netflix released the second season of its popular political drama “House of Cards,” Cogent had outbound flows to Comcast that ran at full capacity for as much as 12 hours a day, according to traffic charts provided by Cogent. Such congestion leads to spinning wheels and slow load times for customers, network engineers say.

As congestion was growing, negotiations between Netflix and Comcast heated up, people familiar with the situation said.

Mr. Hastings and Comcast CEO Brian Roberts talked on and off in recent months to discuss a possible deal, and the two agreed on the framework of a deal at a meeting at the Consumer Electronics Show in January.

The final agreement was signed in the past few days, one of the people said.

Helping seal the deal was that Comcast presented Netflix with more attractive terms than it had previously offered, some of the people said. The agreement spans several years, something Netflix wanted to ensure it wouldn’t be at a disadvantage as its traffic grows, one of the people said.

Under the deal with Comcast, Netflix won’t be able to place its servers inside Comcast’s data centers, as Netflix had originally wanted. Instead Comcast will connect to Netflix’s servers at data centers operated by other companies.

The accord is the latest sign that broadband providers are gaining leverage with content companies.

Last month a court ruled in favor of Verizon in a lawsuit aimed at blocking the Federal Communications Commission’s “net neutrality” rules.

The disputes between Netflix and broadband providers aren’t governed by those rules, which require equal treatment of traffic flowing along the last mile to customers. The deal between Comcast and Netflix relates to direct connections at the edge of broadband providers’ networks. Still, the ruling made clear that broadband access providers face few limitations on terms they can seek in negotiations with content companies.

The deal could remove one potential issue that might have clouded the regulatory review of Comcast’s Time Warner Cable acquisition. The Wall Street Journal reported earlier this month that Netflix was considering using the review process as an opportunity to push for new requirements on interconnection deals like the one announced on Sunday.

The deal’s financial impact on Netflix isn’t clear. The company has been paying middlemen to carry its traffic and it isn’t known whether the Comcast deal, and any forthcoming agreements with other broadband providers, will raise its overall Internet carriage costs.

Netflix apparently has little room to pay more to transmit its TV shows and movies. In a February regulatory filing, Netflix said that if providers don’t interconnect with its servers, its business and operating results could be “adversely affected” because of increased costs.